Now S&P Doubtful over PartnerRe - Analyst Blog
February 21 2012 - 7:15AM
Zacks
Last week, PartnerRe Ltd. (PRE) witnessed
rating downgrade on its credit and financial strength from
Standards & Poor’s (S&P) Ratings based on the severe
catastrophe (CAT) losses incurred by the company in 2011 that has
led to sluggishness in operating performance.
Accordingly, S&P slashed PartnerRe’s credit and financial
strength ratings by a nick to “A-” from “A”, while its preferred
stock rating was lowered to “BBB” from “BBB+”. Besides, the
company’s operating subsidiaries’ credit and financial strength
ratings weakened to “A+” from “AA-”.
Nevertheless, the ratings continue to hold a stable outlook,
whereby S&P expects PartnerRe’s combined ratio to improve to
92–96% in 2012 along with a firm capital competence.
The rating action is backed by the company’s ongoing concerns on
the earnings volatility and decline in equity capital as a result
of increased CAT losses, higher operating expenses, reduced top
line followed by a negative return on equity (ROE) and declined
book value in 2011. The growth metrics of PartnerRe came out to be
very low as compared to its rivals such as XL Group
Plc (XL), American Financial Group Inc.
(AFG) and W.R. Berkley Corp. (WRB).
Moreover, S&P believes that PartnerRe’s higher than average
underwriting risk profile and low earnings propensity, as compared
with the peer group, is likely to persist over the next 2–3 years.
Although the company is well diversified with its long-lasting
relationships, it is yet to enhance PartnerRe’s competitive
leverage.
S&P also opines that PartnerRe management’s overall
enterprise risk management (ERM) initiatives have done little to
deal with the volatile risk profile that hovers over the company
post the acquisition of Paris Re, which was bagged in 2009 for
about $2 billion. The unsuccessful integration of Paris Re has led
PartnerRe to become a vast complex organisation. This has further
resulted S&P in questioning PartnerRe risk profile.
Snapshot of 2011…
In 2011, PartnerRe recorded operating loss of $641.6 million or
$9.50 per share against earnings of $491.8 million or $6.29 per
share in 2010, also exceeding the Zacks Consensus Estimate of a
loss of $9.48 per share.
Additionally, total revenue plunged 8.7% year over year to $5.35
billion, while total expenses escalated 18.5% to $5.8 billion in
2011. Particularly, total pre-tax catastrophe losses rose to $1.79
billion against $437 million in 2010. Thus, non-life combined ratio
also deteriorated to 121.7% from 94.6% in the year-ago period.
Meanwhile, total shareholders' equity declined by approximately
10.3% and common equity declined by 16.6% during 2011.
Consequently, operating ROE and net income ROE came in at a
negative of 10.1% and 9.0%, respectively, in 2011.
Silver lining in the cloud…
Nevertheless, S&P believes that PartnerRe’s meaningful debt
de-leveraging, conservative reserving practices and fair liquidity
with decent operating cash flow and secure credit facilities should
provide some cushion to the risk exposure and equity capital in
2012.
Besides, PartneRe’s renewals data of January 2012 reveal an
improved risk profile with respect to its capital base. Alongside,
a well-diversified business, both through product and geography,
and strong franchise should enhance growth once the market
instability subsides. While these factors are further expected to
negate earnings volatility, the company’s conservative assessment
of its risk profile reduces its competitive strength given its
magnitude of diversification, which is relatively quite low
compared to its peers.
Overall, we hold a cautious near-term outlook for PartnerRe on
the back of concerns regarding the catastrophic losses, weak
P&C market cycle and low underwriting profitability.
In the long run, however, improved pricing and interest rates
along with market stability can help mitigate the cyclical
declines. Hence we maintain our ‘Neutral’ stance on PartnerRe with
a short-term Zacks Rank #3 on the stock.
Earlier in this month, Moody’s Investor Service of
Moody’s Corp. (MCO) demoted PartnerRe’s senior
debt to “A3” from “A2”, subordinated debt to “Baa1” from “A3” and
preferred stock to “Baa2” from “Baa1”. Additionally, the ratings
agency relegated the insurance financial strength ratings (FSRs) of
its principal operating subsidiaries by a notch to “A1” from “Aa3”.
However, the ratings continue to reflect a stable outlook.
Last month, ratings agency A.M. Best also placed the company and
its operations under review with negative repercussions. A final
say from the ratings agency is expected soon now that the company
has released its financial results.
AMER FINL GROUP (AFG): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
PARTNERRE LTD (PRE): Free Stock Analysis Report
BERKLEY (WR) CP (WRB): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
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